COVID-19: Acuite Ratings pitches for Rs 11.2 lakh cr stimulus package to revive economy
Acuite Ratings pitched for the Reserve Bank to play a pivotal role in this aspect by financing the deficit which the government will be incurring, saying there is "adequate justification" for the central bank to step in.
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The government has already announced a Rs 1.7 lakh crore stimulus package, which was criticised for not being enough to fight the slowdown and also for more than half of the 'package' being already budgeted.
Speculation of a second stimulus package has been rife for the last few days, and expectations have increased especially as the second phase of what would be a 40-day lockdown is scheduled to end.
All the rating agencies and economists have been unanimous in cutting their GDP growth estimates for FY21, with some also expecting a contraction in the fiscal year.
Acuite said the additional spending by the government will result in the fiscal deficit doubling to 7 per cent of the GDP as against the budgetary target of 3.5 per cent, and conceded that it will lead to spike in rates and end up harming the RBI's accommodative actions till now.
It can be noted that usually rating agencies are the first to flag concerns on fiscal deficit as it is a key indicator of a country's macroeconomic stability. A wider deficit usually leads them to cut their rating on the sovereign.
Acuite, however, advocated such a move and asked the central bank to finance it.
"We believe there is adequate justification to finance the deficit directly from RBI at this juncture," its Chief Analytical Officer Suman Chowdhury said, adding that the RBI should issue special zero coupon securities.
However, Chowdhury advised caution on this, saying the financing has to be "within moderate limits" as this will lead to an expansion in the RBI's balance sheet, and added that 60 per cent of the book will go to currency in circulation which may trigger inflationary pressures.
The agency said the states should be asked by the Centre to do 50 per cent of the additional borrowing, saying a few fiscally strong states can raise Rs 3 lakh crore, while the rest will come from the others.
From a deployment of the resources perspective, the agency said Rs 1.8 Lakh crore will be required as additional working capital funds for micro, small and medium enterprises, and Rs 1.2 lakh crore for corporates in relatively more vulnerable sectors, which will mean that the government should give a guarantee of Rs 3 lakh crore for borrowings by the two segments."Timely funding support from banks or other sources may avoid permanent impairment of businesses and loss of employment particularly in the MSME segment, thereby arresting any longer term damage to the economy," the agency's chief executive Sankar Chakraborti said. AA ABMABM
(This story has not been edited by Business Insider and is auto-generated from a syndicated feed we subscribe to.)
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